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IS EVERYBODY WHO LOST MONEY with Madoff truly a "victim?" Or should they have known better, especially while they where getting returns that were too good and too consistent to be true?

I'm not talking about the scores of relatively unsophisticated but well-to-do investors who were dazzled by the reputation of Bernard Madoff, the accused mastermind of the biggest scam of all time, an alleged $50 billion Ponzi scheme. They felt lucky to get back past the velvet rope to join the exclusive club of millionaires whose money grew month-in, month-out while tended by the secretive Madoff.

Nor do I refer to the charitable organizations whose good works will now go undone because they trusted Madoff with their endowments. Already, some charities whose money was invested with him have had to let employees go, just in time for the holidays.

No, it is the supposedly sophisticated investors who channeled money to Madoff who should be held to task. Investors placed money with big banks and funds of funds to do the kind of research and due diligence that they were not able to do on their own. For that, they paid these intermediaries fat fees -- and for what? To be fleeced along with the na&iuml;ve investors who just went along blindly based on Madoff's reputation.

"While many dopey investors in Madoff's funds thought he was actually running a 'split strike option' strategy (and most of those people had no idea what that meant), most of the smart investors didn't. They just thought he was using the trading order flow from his securities firm to run a lucrative insider-trading operation, and they were happy to get a piece of it."

While goofy, Kedrosky continues, that makes more sense than believing "any even marginally clueful investor" bought into a strategy that most knew couldn't work as he claimed. These wise guys are really mad now they find they're not in with the scammers, but among the scammees!

That may be way too cynical to explain all the investments by big, prestigious European banks. But it is difficult to figure how so many funds of funds -- whose very job is to separate the sheep from the goats -- could have been taken in. And it is even more astounding what they got paid to do it.

Bloomberg News estimates Fairfield Greenwich Group, which had invested with Madoff for almost 20 years, would have pocketed about $135 million for sending clients funds to the now-disgraced financier.

Maxam Capital Management sold a fund that was invested solely with Madoff. Sandra Manzke, the head of Maxam, told the Wall Street Journal she was "wiped out."

Indeed, not only was Madoff inflating his returns, he effectively was boosting those of the entire hedge-fund industry. The Credit Suisse/Tremont index of hedge funds actually fell 4.15% in November, a sharp downward revision from the small 0.71% drop originally reported for the month. CS/Tremont wrote down to zero three funds exposed to Madoff -- Kingate Global Fund, Fairfield Sentry and Rye Select Broad Marke -- which sent the equity-market-neutral-strategy group down 40% for the month, from an originally reported gain of 0.85%.

A long-time professional in hedge-fund operations shakes wonders how Madoff could have attracted money, not from little, old ladies in Palm Beach, but from fund-of-fund pros.

As reported, Madoff used a tiny, unknown accountant for audits while his own market-making firm handled trading and operations, including custody. That was the supposed attraction to the supposed wise guys: Madoff could front-run his customers' orders, something he has denied in the past.

"I couldn't get dollar one if we didn't have, if not a Big Four, then top five, six or seven, accounting firm. And I would have to clear through a prime broker," this pro explains. How Madoff was able to attract vast sums of professional money, without those prerequisites, remains among the thousands to be answered in this burgeoning case.

Besides the devastating impact on the actual losers, Madoff's scheme surely will further undermine confidence.

Just as the American public has been disabused of the notion that house prices only go up, they already were becoming increasingly wary of investing in assets such as equities. Risk aversion is palpable with Treasury bills hovering near zero percent. One broker says the only thing his clients want these days are short-term prerefunded municipal bonds backed by U.S. governments held in escrow.

Fear is understandable for unsophisticated investors who lost money in Madoff's scam. That professionals were taken in is incomprehensible.